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Break clauses breaking the bank?

The anticipated appeal of the High Court’s decision in Marks and Spencer plc (“M&S”) v BNP Paribas Securities Services Trust Company (Jersey) Ltd (“BNP Paribas”) was heard by the Court of Appeal on 25 March 2014. This case has big implications for tenants when exercising their break clauses.

The Court of Appeal reversed the High Court’s tenant-friendly decision allowing for a reimbursement or refund of monies relating to a period of overlap. BNP Paribas (the landlord) entered a commercial lease with M&S (the tenant) on 25 January 2006 for a term of around 12 years. Break clauses were defined terms as exercisable on either 24 January 2012 or 24 January 2016 with rent payable on the usual quarter days. Sums were paid in accordance with the lease in order for the break to be effective. The tenant subsequently applied for reimbursement. At First Instance, the High Court found that where a commercial lease remains silent on what would happen to monies paid in advance and relate to the period after the break a refund was re-payable.

Usually, leases will often allow for apportionment with express saving provisions or claw back clauses. This ensures fairness, avoiding the tenant paying for premises it no longer occupies.

BNP Paribas appealed against the decision that a term should be implied into a commercial lease entitling M&S to a refund. The Court allowed the appeal and has now found that no such term will be implied into commercial leases. This can be a major commercial factor for both landlords and tenants when considering activating a break clause.

The decision at First Instance

M&S, the tenant of four floors of office premises and a cark park in Paddington, were party to a lease (specifically four sub-leases) requiring rent payable quarterly in advance together with payments towards a car parking licence fee, service charges and insurance.

The lease was due to expire on 2 February 2018 but had the benefit of allowing the tenant to terminate the lease on either of two breaks. The first break date was 24 January 2012 or alternatively 24 January 2016.

The break was conditional upon:

There being no arrears;

Payment of a premium of £919,800 plus VAT; and

Service of a valid break notice.

​A break notice was validly served in July 2011 to be exercised on 24 January 2012 (the break date) and M&S paid the premium along with a quarter’s rent in advance. The rent related to the period from 25 December 2011 to 24 March 2012 (covering also the broken period). Given the silence in the lease on this point, BNP Paribas refused to reimburse M&S and M&S issued proceedings.

At First Instance, to the delight of commercial tenants, the Court found in favour of the tenant on the basis that a term could be implied into the lease. Morgan J considered that the lease would, when read in its entirety and placed into its factual context, be reasonably understood to mean that any amounts paid in advance for the broken period should be repaid and a refund was therefore due.

The Court of Appeal

Given the usually landlord-friendly law in respect of break clauses, the decision at First Instance gave tenants a ray of light, but this was short lived having been unanimously overturned by the Court of Appeal.

The appeal was allowed and it was held that the test for implied terms, whilst correct, was applied incorrectly. Essentially, in the absence of the words in the lease and in light of the provisions of the lease, the Court of Appeal concluded that the parties had intended the loss from a payment of rent for the broken period to “lie where it fell” thus a consequential loss to a tenant’s pocket. No term for repayment could be implied.

Implications

This case will raise awareness amongst landlords. Some may have already, out of the goodness of their hearts, perhaps unthinkingly paid such 'refunds' when requested. Others may have held their ground firmly that the default position has always been that, without a specific repayment provision, such sums are not refundable. To the delight of many, if not all landlords, the position has now been clarified. Tenants will need to be much more cautious and aware of what they stand to pay out in future.

As for new leases, care and attention should be given when drafting and considering break clauses to ensure that a one-off right to break does not become a costly entitlement. In practical terms consider:

when rent and service charges are due;

what period the payments relate to, with due consideration of when a break date if exercised, would fall in relation to rental payment dates; and

could an apportionment clause or a claw back clause be drafted into the lease should a similar scenario arise. For instance, if a landlord takes possession or another tenant takes occupation shortly thereafter.

​It remains to be seen whether the case will be escalated to the Supreme Court and whether the Apportionment Act 1870 will be applied by operation of law; for now it will not. Whilst the case seems correct in law, it leaves a rather unsatisfactory and unfair position for tenants. There is a clear risk that considerable payments will be due on or around break dates for which it is now clear reimbursement will not apply.

Compare jurisdictions:Litigation: Enforcement of Foreign Judgments

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